Shell to quit US Arctic due to "unpredictable federal regulatory environment"

Guest post by David Middleton

Disappointing results from an initial rank wildcat can’t kill a play.

The cyclical ups and downs of product prices can’t kill a play.

High operating costs can’t kill a play.

Only massively incompetent government can kill a play.

“This is a clearly disappointing exploration outcome,” Marvin Odum, director of Shell’s Upstream Americas unit, said in a statement. While indications of oil and gas were present in the Burger J well in Alaska’s Chukchi Sea, they weren’t sufficient to warrant further exploration, the company said. Shell will now plug and abandon the well.

Shell had planned a two-year drilling program starting this July. The company was seeking to resume work halted in 2012 when its main drilling rig ran aground and was lost. It was also fined for air pollution breaches. The Anglo-Dutch company first discovered oil and gas in the region in the late 1980s.

The company continues to see potential in the region and the decision not to explore further in Alaskan waters “reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska,” according to the statement.…ulations-costs

The potential of the Alaska OCS is nearly as large as the Central Gulf of Mexico…

Product prices and exploration results are by their nature, unpredictable. Operating costs are tied to product prices and regulatory requirements. Regulatory requirements must be predictable in order for any business to function.

75 thoughts on “Shell to quit US Arctic due to "unpredictable federal regulatory environment"

  1. Regulatory requirements aren’t the main issue in the Arctic.
    The North Sea is well supported by the UK Government but is almost dormant right now as well.
    (I wish the Tories looked after UK steel like that).
    It’s fracking that’s lowered the price of oil and made this area not economic at the moment.

    • It’s sad when an old friend goes into terminal decline. I used to work on North Sea platform design and on the Fife Ethylene project … back when the engineering profession had some reality in the U.K.

    • Regulatory requirements killed this because they were dynamic. Tight regulations can be handled. Unpredictable, constantly changing reg’s cannot be handled in places like the Chukchi Sea,

  2. “California Dreamin'” regulations have shut down or priced out of the market a number of US industries. (Along with labor cost.)
    Many of them have moved overseas were both are less. Are we or the world better off?

    • One thing that I have noticed is that many of the people who whine the loudest about companies that ship “our” jobs overseas, are among the first to demand higher taxes on businesses and more regulations on them.

  3. The net result of political interference in any business is that you wont want to make long term investments in the field in case the government changes and political expediency forces top to abandon multi billion investments.

  4. The opening lines of this article are incomprehensible. Is this a Google translation from Korean?
    What is “an initial rank wildcat”? What do wildcats have to do with plays? And what do plays have to do with oil production? (If “wildcat” is used in the oil-drilling sense, that has a connection with oil-production.)
    And “Only massively incompetent government can kill a play” just isn’t true. Really bad reviews can kill a play. Burning down the theatre on opening night can kill a play.

      • @ RoHa
        Yr: “Can you translate that into English?”
        I dunno about any English translation, but the Korean translates as “RoHa, sit down and take some slow, deep breaths. Then go and have a cup of tea.”
        P. S. Did you notice, RoHa, how I considerately indicated, via a “sarc”-tag, that my comment was intended as just a joshin’-around bit of knee-slappin’, ironic, regular-guy, good-humor, and everything, as a precaution against you goin’ off all fulmination-booger, ape-shit spastic-“whinger” on moi, just because my comment might inadvertently “jerk your chain”, due a teeny-weeny, little, cultural-context misunderstanding? See how it works?

      • @RoHa
        Oops! I misplaced my response so that it’s now at the bottom of the comments. So let me try again,
        Yr. “The Korean is sound advice…”
        Good response, RoHa. Glad we can both enjoy a little tit-for-tat good-fun. And you’ve even gotten me cautiously thinkin’ about that “cup of tea” business.

    • “wildcat” means a well in an unproved area. “Rank” means one of the first. “Plays” mean fields or formations.
      These are oilfield terms. Like most industry, the have developed their own terms. The worst are TLA (three letter acronyms) that are used ubiquitously.

      • Try reading a scout ticket… 😉
        Plays are sets of fields and prospects assembled within a particular geologic setting and/or trend.

    • I assumed most readers here had at least a third grade reading comprehension… I guess I was wrong.
      Shell was drilling a rank wildcat. It was their initial well in the play they had developed in the Chukchi Sea. Disappointing results of an initial wildcat do not kill plays. If they did, almost every oil & gas play would be stillborn.
      Shell began putting this play together over 10 years ago, began acquiring leases in 2008 and was ready to begin drilling this in 2011…

      Making the Next Giant Leap in Geosciences
      April 10-13, 2011, Houston, Texas, USA
      Unlocking the Exploration Potential of the U.S. Chukchi Sea Continental Shelf, Offshore Arctic Alaska
      John L. Shepard1; Steve Phelps1; Robert Scheidemann1; Robert Foster1; Mark Newell1; Michael Roffall1; Cody Teff1; Charles Minero1
      (1) Shell Exploration & Production Company, Houston, TX.
      The U.S. Chukchi Sea OCS region shares strong geologic affinities to the prolific North Slope petroleum province but differs in its tectonic history. The area contains numerous giant composite structural/stratigraphic prospects within three major plays (Ellesmerian, Beaufortian, and Brookian Sequences). Shell’s initial multiyear (1989 – 1991) four well program demonstrated a working petroleum system but no commercial reserves were demonstrated. The leases were subsequently dropped in favor of the emerging Gulf of Mexico deepwater play.
      Shell began to re-evaluate this region in 2004 and targeted it as one of its key global oil growth areas. Shell reprocessed legacy 2D seismic and acquired focused proprietary 3D seismic surveys prior to the 2008 OCS Sale 193. The assessment built upon the proven petroleum system elements and used modern exploration technology combined with updated tectonic and paleogeographic analyses to identify and derisk a diverse portfolio of large to giant-sized prospects within all three plays. Significant advances in development technology since the 1980’s, such as extended reach drilling, are expected to enable economically robust, small-footprint development of future discoveries.
      Shell has acquired shallow hazard surveys and scientific baseline data to support the 2009 EP submission for 2010 exploratory drilling. Shell has invested heavily to meet local community, state and Federal stakeholder aspirations regarding a responsible pace of exploration. This has included, but is not limited to: 1) collaborative listening to the NSB, NWAB, native Corps, Village Corps, AEWC, and communities and incorporating their input into the Exploration Plan; 2) emissions and discharge modifications to the drilling fleet; 3) development of an oil spill response plan in excess of state planning standards; and 4) the provision of local jobs and workforce development opportunities within Alaska, in particular the North Slope. The EP was approved by regulatory agencies but the drilling campaign preparations were halted in May 2010 as a result of the DOI’s suspension of Arctic drilling following the Horizon Incident.
      Shell is currently preparing to meet the regulatory requirements and address stakeholder concerns to enable the exploration drilling program to commence in 2012. This program could unlock significant US domestic reserves and provide additional encouragement for exploration within the adjacent Russian Chukchi Sea area.
      AAPG Search and Discovery Article #90124 © 2011 AAPG Annual Convention and Exhibition, April 10-13, 2011, Houston, Texas

      That is when the Obama Administration began its onslaught of regulatory malfeasance
      Under a lawful regulatory environment, Shell would have been drilling several wells per year and would have simply moved on to the next prospect, rather than killing the play.

      • You are correct. Complete incompetence specifically in the USFW Service is responsible for this debacle. They were late in the permitting process, and incompetent and incoherent in the policy and permitting that they ended up making absurd permitting constraints that limited Shell to be able to drill only one well at a time, leaving the other rig in stand-by…wasting millions of dollars per week on a constraint they couldn’t explain or defend, but would not modify (i.e., drilling rigs could not simultaneously drill less than 15nm apart). Burger J and V are closer to 12nm apart, so one rig was in stand by, at over 3/4 million flushed down the toilet each day.
        The environmental lackeys one the day. But I’d seriously doubt anyone of them care that all those communities on the Chukchi coast will slide back into abject poverty with unemployment rates approaching 50%, high suicide rates, and no hope except for handouts from the state of Alaska and the feds.

  5. Contrary to some alarmists claims, the money spent on exploration is not a complete loss. The information gained will be filed away for future reference. Climates are cyclical, political, economic and environmental.
    Regime change is coming. The market will likely look a lot different in a year or two.
    Alarmists are rejoicing over Shell’s move, but seem unaware that the low price of oil will also cripple so called “renewables”.
    Completely fact free propaganda here!
    Ad here.

    • Nothing kills renewables. National economic ruin can’t kill renewables. Free oil wouldn’t kill renewables. Renewables are and always have been independent of conventional economics in which costs-versus-benefits are rationally weighed. They’re the spawn of a “Green” religion where “faith” is the coin of the realm.

      • “Nothing kills renewables” – renewables would die of starvation without the gigantic government subsidies.

      • “Rhode Island began construction on Deepwater Wind’s $225 million, 30-megawatt offshore wind project in July.”
        That tells me all that I need to know.
        No idea was ever more dumb than the siting of wind turbines in DEEP WATER.
        I can no longer be bothered to explain to people why that is quite obviously very dumb.
        I am reduced to the rhetorical question, “has my own generation gone completely insane?”

    • Unfortunately, Shell didn’t gain much new information. The play they had developed is still mostly untested.

  6. If you think Alaska is a difficult place to drill, you should try it in certain developing countries.
    Regulatory quality in developing countries includes stopping drilling because it might cause a tsunami (yes I have seen this).

    • I assume the tsunami risk could have been dealt with by paying a suitable “inspection fee”, ruling out the drilling being in a tsunami risk zone?

    • You expect that sort of thing in lawless Third World nations. This sort of institutionalized corruption isn’t supposed to happen in the civilized world.

    • It is them or us. We don’t need them …

      Our civil servants fill an extremely useful function in society. The problem arises when they start to think of us as the servants and them as the masters. The EPA comes immediately to mind in that regard.

    • True. If a thing will be cheaper tomorrow, why buy it today?
      And nothing kills an economy faster or more surely than wallets snapping closed.

      • Typical “consensus” economic BS. We hear that every days on the media, and it makes no sense whatsoever.
        People buy food today because they want to eat today.
        Computers are getting cheaper and more powerful every year, people know that, and still buy computers.
        And even when stuff doesn’t get cheaper every year, people will even borrow money to get something today that they could buy it for less next year. Because they need it now or want it now.
        Only the “mainstream” (ie as clueless as a climate scientist) pretend the economy doesn’t work like a 8 years old thinks it does, they say real economy is not intuitive and based on common sense, but it really is (like the scientific process).

      • simple-touriste, good points. All true for individual decisions.
        But do those points apply to Corporate Investment?
        Where people need to make collective decisions the easiest decision is always to not stick your neck out and kick it down the road.
        Deflation makes that choice justifiable. So it becomes the only choice for large corporations, NGOs and Governments.
        And that slows the economy.

      • If I need something today, if I can afford it, I’ll buy it.
        Only Governments love inflation, as it effectively reduces the amount they’ve borrowed.

      • With the exception of food, pretty much everything that consumers buy, could be delayed by a few weeks or months. If consumers start buying new cars every 5 years instead of every 4, that’s a 25% drop in the number of new cars sold every year.

  7. “Disappointing results from an initial rank wildcat can’t kill a play.
    The cyclical ups and downs of product prices can’t kill a play.
    High operating costs can’t kill a play.
    Only massively incompetent government can kill a play.”
    Of course disappointing results can kill a play. From Shell’s statement: “Shell has found indications of oil and gas in the Burger J well, but these are not sufficient to warrant further exploration in the Burger prospect…..this is a clearly disappointing exploration outcome for this part of the basin.” Let’s go through your logic: Shell spends billions over many years to get ready to drill in Alaska, and eventually meet all regulatory requirements, and get the go ahead from the Obama administration (over the objections of environmentalists). Shell received the approval they sought. Shell fits out a rig, and moves it to Alaska, then drills the Burger J exploration well. You are saying that Shell then stop all activities due to the federal government. That makes absolutely no sense.
    And of course high operating costs can kill a play. Here’s a graphic of the active oil rig count in the US: Note the decline in rigs, even in extremely oil friendly states such as Texas.

    • @ Chris, It is called a surplus driven by a dead world economy, next answer? A war just to drive industry and consumption.

    • Look up the phrase “oil & gas play.”
      Shell needed to drill several wells per year over several years in order to evaluate this play. They were ready to start drilling in 2011. The regulatory malfeasance limited them to drilling one exploration well in seven years.
      They started out assembling this play in 2004. The ups and downs of product prices over the past decade did not kill the play. Nor would future ups and downs in product prices. They knew operating costs would be high going in. Although the vast majority of the costs would be associated with field evaluations and developments. What Shell did not anticipate and was not prepared for was a “dynamic regulatory environment.” In a rule-of-law nation, this should never be a risk factor.

      • I know what an oil and gas play is, but thanks for checking. I do not work in the oil and gas sector, but have friends that do here in Asia where I live. They tell me that multiple multi billion dollar offshore rig projects have been canceled or delayed indefinitely due to low prices – and these are in sites with much more promising initial results than Shell experienced. Obama approved Shell’s request for drilling in April, less than 6 months ago. Shell sent a rig to Alaska in May, and started drilling at the end of July/early August. What specific regulatory environment changes happened between the approval date in April and end September 2015?

    • @Chris on September 30, 2015 at 11:50 pm
      Shell’s drilling permit was first approved in 2010. The approval was rescinded. Over the next few years, the requirements constantly changed. They were required to deploy equipment that didn’t exist outside of custom builds. The drilling season was arbitrarily shortened.
      The straw that broke the camel’ s back was the requirement to deploy an idle rig, just in case a relief well was needed. In the Gulf, this requirement is fulfilled by rigs operating on other projects. Offshore Alaska, Shell was not allowed to use the backup rig to simultaneously test another prospect.
      More than five years after obtaining initial approval of their exploration plan, regulatory malfeasance had limited Shell to drilling one exploration well.
      You clearly have no idea what a “play” is, if you think it’s a project.
      Five years of regulatory delays of specific projects killed this play (technically several geologic plays).
      Shell did not delay or cancel a project. They are walking away from the US Arctic.

  8. Looking at a blown up photo of the European immigrant disaster I see the Number 1 problem in the world today! Taking a count, 132 immigrants (male 108-female 32 ) so called journalists/cameramen 43

  9. What kills Arctic exploration is doing your costings on the basis of three times the ice free time that actually happened as much as lower end pricing.

    • Heavier than expected sea ice caused a lot of headaches. It didn’t kill Shell’s play.

      • Headaches mean one of two things. either they reveal problems cheaply avoided or they reveal problems of really much higher than planned overheads and lower than planned reliability. In this case they revealed the latter at a time of low returns on investment.

  10. “Disappointing results from an initial rank wildcat can’t kill a play.”
    Yes it can. I have been in oil exploration all my professional life. If you drill a first well in a basin basically as a stratigraphic test so you can identify what the seismic character represents lithologically, the result may for instance indicate that there is no reservoir/seal pair that can optimally trap hydrocarbons. I remember we entered a new play/basin in Vietnam and the first well killed the whole play because it was a thick sandy sequence with ample shale to seal a potential reservoir.

    • They didn’t find the wrong geology and this doesn’t make geologic sense…

      the first well killed the whole play because it was a thick sandy sequence with ample shale to seal a potential reservoir.

      A “a thick sandy sequence with ample shale to seal a potential reservoir” is what you look for in a clastic environment.
      The initial rank wildcat in the Lower Tertiary play in the ultra-deep waters of the Gulf of Mexico was disappointing. It even found the wrong geology. Instead of Mesozoic carbonates, it found Lower Tertiary clastics.
      The wildcat was disappointing. However, it did find reservoir rocks and an active hydrocarbon system. Had they found red beds devoid of TOC, that might have killed the play.

      • Sorry David, I reread what I wrote, I meant the opposite. This is because I used the wrong word “ample”. In Dutch (for me confusingly) we say “amper” which translate into “hardly any” and that is what I should have said..

  11. @RoHa
    Yr: “The Korean is sound advice…”
    Good response, RoHa. Glad we can both enjoy a little tit-for-tat good-fun. And you’ve even gotten me cautiously thinkin’ about that “cup of tea” business!

  12. This is a win-win for govt.
    They get to kill drilling in the Arctic, without having to suffer the heat over an outright ban.

  13. “Welcome to our world.”
    – Basically anything outside of the legal industry and maybe its select allies in journalism, political science, and public relations.

    • I don’t know what the rules are up there… In the GOM, BOEM makes you release the logs after two years.

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